I used to think saving and investing were only for the rich. Sure, I’d save money, but in my savings account (hello barely more than 0% interest) and if I was feeling really lucky, I’d invest in a short-term CD and make a few bucks. Nothing that was going to get me rich or even close to financially secure.
I assumed, this was it – this was how was supposed to save money. I didn’t have a lot of money. Sure, I made a decent income and didn’t live paycheck-to-paycheck, but I didn’t have Warren Buffet type money either so investments were off the table.
As it turns out, they weren’t, and I kind of wish I started earlier. Nonetheless, I was able to save $90,000 and today I earn $300 a month in passive income because of my habits. I’m sharing them here so you don’t make the same mistake I did and wait so long. Start saving money today, whether you have $100 or $10,000 – there are investments for everyone.
The good news is that it’s easy to get started even with $100.
How I saved $90,000
1. I set up a Vanguard Account Online.
When I say that it’s easy to set up a Vanguard account online, I’m not exaggerating. You choose the type of account (I chose an individual taxable account), and then provide your personal information.
I provided my name, Social Security number, birth date, address, and employer name. Vanguard doesn’t share or sell my information so I felt comfortable providing this information.
Next, I linked my external bank account – the one I would use to fund my Vanguard account and I transferred a few hundred dollars. I was ready to invest – it was pretty easy.
One of the main reasons I chose Vanguard to save money was the commission-free trades. All ETFs have no commission costs, which means more money in my pocket.
2. I setup automatic contributions to save money every month.
I started by transferring $100 a month, but once I went over my budget and made some changes (cut the cord, canceled unnecessary memberships, and switched insurance providers), I was able to save $500 a month.
I set up automatic transfers. I highly recommend this. If you’re like me, it’s easy to let transferring and saving money slip your mind. Before you know it, a few months pass and you didn’t save anything. I put it on autopilot and never had to think about it again.
3. I followed Buffet’s advice and saved my money in Index Funds
I know, this part is scary, but I did my research. I followed Warren Buffet’s advice for personal investors and for me, it worked out quite well : Warren Buffett thinks index funds are the best way for everyday investors to grow their money. Buffett is considered one of the most successful investors in the word and you can’t really go wrong by following his advice.
An index fund is an investment that tracks a market index, like the DOW Jones or the Nasdaq. Vanguard even has an option to invest in the entire U.S. stock market. It’s called “Vanguard Total Stock Market Index Fund”. Other stock brokers also have total stock market funds, including Fidelity with their “Fidelity Total market index fund”.
So how well does an “index fund” perform?
I kept most of my investments in this Total Stock Market Fund. You can see the graph below that shows it performed really well since 2010. A $10,000 investment in 2010 would have “hypothetically” grown to over $35,000 in 2020. Not bad.
I did this for 10 years and voila – I had $90,000 in my Vanguard account in what felt like the blink of an eye and all because I automatically transferred $500 a month to my Vanguard account.
**Disclaimer – These results may not be indicative of what you achieve, especially if you’re starting now in the tumultuous economy. The Dow Jones return in the past 10 years has been good, but there’s no guarantee it will continue moving forward.
How I generated $300 per month in passive income
Here’s the fun part. Now I had this $90,000, which is great, but I can’t retire on it – I need A LOT more to retire, but it was a great start.
But I wanted my money to work for me. In other words, I wanted passive income. Monthly income to be exact. Because I’m still not a stock expert, I stuck mostly with Vanguard funds, after all, they haven’t disappointed me yet.
Here’s the difference. I focused on dividend funds instead of index funds. This is where the passive income starts. Dividend funds pay me dividends (part of the company’s profit) either monthly or quarterly, it depends on the funds.
I bought several funds on Vanguard, including VHYAX, VYM, and SPYD (this one has a higher yield). These investments keep me in the stock market but pay me every month or every quarter.
On average, I earn $300 a month in dividends, which means more buying power in the market. I still contribute my normal $500 a month, but if I can bump it up to $800, imagine where I’ll be in 10 more years.
Will this work for you? It depends on your dedication, risk tolerance, and the ability to transfer funds regularly. Remember, you may or may not have the same results as me – the market is unpredictable.
You can also learn how to create a budget to manage your money and increase your savings to be able to invest more in the stock market.
How to decrease risk
Some of you may be concerned about losing money in the stock market, and that’s a very valid concern. The market can be up or down in any given year. If you want to reduce your risk because you don’t like losing money in any given year, or because you think you will need the money in a few years (for instance for a down payment on a house), you may want to follow a more conservative approach. For instance, you could invest 70% in a total stock market fund, and 30% in a cash reserve fund like “Vanguard Cash Reserves Federal Money Market Fund (VMMXX)”. This will protect your investments in case of a downturn.
No matter what, though, consistency always wins, even if your account sees major ups and downs (thanks to the pandemic and election), if you stick it out, you should see progress that mimics or comes close to mine.